Globalization, Energy, And The War In Ukraine

quick fight. For the way, when they're finished in Ukraine, in China's do they will turn to China, and at that point chinaese Russia. Clara for Marquez and Julie Ran on China walking a tight rope between trading partners and allies. Later, John Authors joins on how some of globalizations discontented countries could potentially profit from deglobalization. We'll also speak with Heavier Glass on whether oil sanctions will materialize and how the

market will cope. First to the idea that this may be a pivotal moment for the global system, Adrian Wildridge joins, Adrian, are we witnessing not just new atrocities in Europe so called blood lands, but also the demise of globalization, that is, open market economies driving towards economic integration, bringing freer trade, capital flows, migration even and ideally leading to increased prosperity for all. It's a very serious possibility. Everything depends on

what happens. Everything depends on where the putin stays in power. But I think this has the feeling of what happened after the First World War, that this could be the beginning of a series of actions which lead to the end of globalization. Yes, the illusion that war is impossible given the interconnectedness of the world has now been shattered. But it had been under severe threats several times over the last twenty years. Why is this particular invasion the

death knell. Yeah, it has been under a very serious threat over the last twenty years. And of course we all remember September the eleventh, which many people saw as the end of globalization, and we've had a lot of protests against globalization linked to globalizations effect on rising inequality. But I think to invade a European state in the way that Russia invaded Ukraine, for the leader of a state to threaten the use of nuclear weapons, to engage

in what looks to be war crimes. It's something that hasn't happened since the Second World War, and it's something that's created an extraordinary backlash. We haven't seen a rupture in the global economic system like this since September the eleven, and we might well only be at the beginning of this rupture. There was a scramble to figure out what could be done legally and within the global international order. Obviously, sanctions economic warfare. That's one of the ways that Russia

can be punished. But how do you champions sanctions as an economic weapon and still forge closer ties with countries that very much oppose them. I'm thinking obviously of China, which is very opposed to the effort by the US to pressure it into enacting sanctions. Well, I think it has to remembered that the West, broadly conceived, still constitutes about six of global g d P. The autocracies constitute about of global g d P, with a number of

countries floating in the middle. And I think if the West can cohere as a unit, the Chinese will be confronted with the fact that if they side with Russia, they will be siding with a small chunk of the world, and they will be progressively excluding themselves from the biggest and most dynamic market in the world. So I think their self interest would dictate to them to remain neutral. They've seen what the West can do if it is

united and angered. So I think the likelihood of China trying to take Taiwan is less now than it was, and the likelihood of China acting as a sort of rule breaker in the international system is less than it was. Does there need to be essentially a new Breton Woods type of agreement? And if that's the case, the trouble with Bretton Woods was that it was also a little bit designed to sort of promote American geopolitical influence. Would

another type of Bredon Woods agreement even be possible? Oh? Absolutely. I think that what we need to do is to deepen the relationship between the democracies in order to link our political common interests with our economic common interests. So deepen and advanced trading relationships. I think that's absolutely the case. But that doesn't require a new Breton Woods. I think it requires a lot of trading arrangements like t TIP

to be revived and reinvigorated. So I think in that sense it's a deepening and an extension, not the creation

of new institutions. Now, there are other institutions that do need to be created to deal with global problems, primarily climate change problems, and I think in order for those to be created and to operate well, we have to realize that they have to involve non democratic countries, they have to involve China, and in the long term they have to involve Russia because this is the of the planet. So I would argue for deepening trading relationships and for

very broad institutions that look at very specific things. Well, and I suppose that's you know, the final point. Really, can globalization as a force ever get weaker given the US dollars dominance as a global reserve currency, which after all is the currency of most nations if you include swaplines and so forth. Yeah, I think it can get weaker because China is likely to get significantly stronger over

the next few years. It's still growing very rapidly. And also there are a number of countries that sort of strategically staying a bit in the middle, such as India. And finally, I think it's important to remember that although the majority of the world's GDP, as it were, is

siding with the West. The majority of the world's population did not support the condemnation of the invasion of Ukraine in the United Nations, so a large chunk of the emerging markets of the world sort of stayed neutral, didn't want to annoy China too much. So it's not quite

as clear cut as it looks. And I think the logic of decoupling China from America, of a number of emerging countries playing sort of the spoiler role of sometimes stiding with America sometimes siding with China, makes globalization look

a bit more tenuous. And also, I think one of the most important things to remember is that there's a question of the mindset of global CEOs, of global market makers, and I think now they're much less confident that they have a global market to play with and that the world is getting ever more integrated. They're worried that the world will split up into rival blocks. It might be

Europe plus America against each other in some ways. In other words, multiple ways in which the world could fragments, and I think that is influencing CEO mentality is to be much more focused on regional organizations rather than on creating one world companies Adrian Wildridge. There, let's get to the question of China's role in the global response to Russia's war in Europe now, and specifically what choices China needs to make navigating between its trading partners and its allies,

not to mention it's domestic economic struggles. We're joined by Schuloen in Hong Kong and Clara Frera Marquez in Singapore, So more and more rhetorical pressure is being placed on China too, if not join in with other countries on sanctions, at least not interfere with the economic warfare that Europe and the US are waging on Russia. But Julie, China is not having it. How much do we know is

China actively helping Russia in any way? I think we know very little about what's really behind the scenes, But so far there's very little evidence that China is helping Russia. China has told it makes their own banks to be very careful in its dealings with Russia as well as the energy companies, because it's quite easy for China to be matching the so called secondary sanctions if you help sention the entity in the material matter, the Treasury Department

can sention the third party company as well. For China is very careful with that. Clara, what calculation is China in particular making by protecting its relationship with Russia? Is it purely for economic logistical reasons? Well? Those I think two things to bear in mind. One is the China throughout this conflict, who's trying to juggle several imperatives. One is its ideological alignment with Russia. Then it's ideas of sovereignty and territorial integrity, which are called for China, and

then of course it's economics. As Uley mentioned, here's still trying to balance that. But on top of that, it's also seeing this conflict very much to the prism of its own relationship with the United States. And in that sense, there's very little in it for China to make this an easy fight and a quick fight. For the way when they're finished in Ukraine and China's do and in the view of many commentators we've seen in state media, they will turn to China and at that point China

neese Russia. And this is a truly you've actually said that China inc could easily become collateral damage in the economic war the US and Europe are waging. But how would that materialize? It would be quite difficult for the US to actually do anything beyond trying to influence China by powers of persuasion. Right. I think US has been using re sensions on Chinese companies and uh China complains

about the abuse and overuse of sensions a lot. But hypothetically, say Ali Baba has e commerce and business in Russia, right, Like, if Ali Baba continues that subsidiary, what does it mean

do they provide material support to Russian entities? Technically Ali Babba could be placed on a sanction list, which means that US some managers can no longer buy Ali Baba's box, you know, like they are laws of ways, right, Or like the a company who buys technology and supplies from the US, that company can be placed on the pre human Control list that basically it can no longer imports stuff from the US. There are many ways for the

US to sanction Chinese company Clara. Will there come a point where China and indeed India too, In fact, you know, to the largest populated countries in the world, where they need to choose where there will be so much pressure placed on them, and we've seen it this week. Brands actually called out India and said that the White House was disappointed by new DELI will there come a point

at which they have to choose? And in that instance, wouldn't it make more economic sense for both of them to stay on the good graces of the EU and the US. Well, I mean, let's take China. So at the moment, it hasn't really had to choose because Russia's economy has been remarkably resilient. So it was hit with the sort of wave of sanctions initially obviously that was very painful. That it has to a large extent adapted. The Central Bank has been able to intervene and sustain things.

There's a lot of measures that they've put in place as the situation becomes worse in Russia. If the Russian economy looks like it's going to fall over, at that point, China will be asked to come in and help, and they're the choice we have to is the West have to make that choice very very clear that if you support Russia, you will be putting yourself at risk for all the reasons that Shu they mentioned, and beyond especially if secondary sanctions are brought in your risking in essence

your position in the integrated global economy. So India it's a slightly different position. And I would say that this week they've actually come out against massacre in Butcher and condemning the massacre in Butcher, So a little step towards the West, but in many other ways, still extremely cautious. Yeah. Julie Clara brings up a great point there that that there may indeed come a time where China will be forced to make a decision where China will be forced

to pick sides. But China has its own domestic problems, not to mention its own domestic ambitions. Its property industry is slumping. We know that at zero COVID policy, which turned into dynamic clearing and now something else, has also been extraordinarily difficult for that economy. And it's saiming for a growth rate of five and a half percent this year.

If it needs to get more involved somehow in this war by Russia on Ukraine, can it make its five and a half percent growth milestone if it alienates you know, any of its trading partners. I think at this point, I haven't half growth target is you know it's offensisy um. I absolutely like as Clara said, at some point China will have to choose right. As we have seen in the last basically year during the pandemic, one of trying

to on this economic fields is exports. China was exporting to the rest of the world at racks of page right, and then US and the European unions I get biggest fires. So China has a lot of insensive to keep exports up when as you said, there's so many domestic issues.

I mean, cities accounting for a quarter of China's GDP are in some kind of lockdown bline now, like they really really need this exports going Clara, you know, slightly obliquely to this topic, you've pointed out that China has long studied Soviet and Russian errors as a means of avoiding its own errors. In terms of witnessing the fallout from Russia's invasion of Ukraine. What does it mean implication

wise for China's ambitions when it comes to Taiwan. Does it not make it less rather than more likely that China would make a move now having seen how the international response has been well, it's a very complicated question, and I think we should be clear at the outset that China does not see parallels between Taiwan and Ukraine.

For China, the two very different situations. However, if the West continues to sort of at the end of the sanctions ladder act in it in a way that isn't united, the risk here is that China sees this as a how to guide looking to Russia, as you know, the litany of errors that it needs to fix a lot like, as you said, the way they see that the end

of the Stuviet Union. So for example, in this case, it would be we need to dedolarize their economy, we need to sanction to prove better, we need to work on nuclear deterrents, we need to have military parity with the United States before we put the gun on the table in the relationship with Taiwan. If, on the other hand, the West act in a united way, it's a lot more off putting. Surely perhaps I could get your thoughts on that as well. I think there is one school

of starts in China. There's the actor looking at Russia and what Clara said, and China is not ready right, They have to prepare for their own, you know, international payment system. What China is going to do with this massive foreign exchange reserves basically a lot of it in yours treasury, fiance or forth. So there is the schools of far saying that China needs to wait for a few years to make it truly to be santioned Julie When in Hong Kong and Clara Ferrero Marquez in Singapore.

Listeners do get in touch via Twitter at Vonni Quinn or send you an email at v Quinn at Bloomberg dot net. Opinions and comments always welcome. As the West ups the anti on Russia, the stakes remain pretty moderate for Russia, that is, unless and until oil and gas become the target of embargoes with US. Now heavier blasts in London haveavier winter is coming not for several months. But as you point out that you wants to fill its underground gas storage to eighty percent of capacity by October,

it's only at about twenty six percent. Now you've done the math, and that's thirty six billion dollars for Vladimir putin more than half his annual defense budget, which presents a huge moral dilemma. Is there a solution here, Well, it's a very difficult situation for the European Union because if he wants to fill up gas toll it, it really needs to continue buying Russian gas, and that obviously means pain Russia. At current prices around two hundred million

dollars a day for the next six months. Ellen g from elsewhere from friendly nations to Europe, such as cat out of the United States is going to help. But if Europe cannot get Russian gas, then inventories aren't want to still up to eighty percent, perhaps they get to something like sixty s and that means that next winter the situation will be difficult and will result on higher prices. However, it seems like some European countries are willing to make

bigger sacrifices right now. Is it just Hungary, Austria and obviously Germany that have to get on board, those are the three ones. But I think that some European countries are saying publicly that they don't oppose an embargo because they know that the Germans are going to block it, so it costs them nothing. They can say something for

public opinion. We want to do the right thing. We want to punish Russia, knowing very well that there is zero chance whatsoever of a gas embargo because immediately Germany and Hungary and House will block it, but above all Berlin will block it. So it is quite convenient for them just to kind of hide behind them. But certainly Germany has a big problem. It relies more on gas

and other countries. About of all the guys that Germany consumes comes from Russia, and Germany doesn't have lergy options to import, so we will have to rely on neighbors for that. So I don't see the German government changing his view right now. But obviously the longer the word goes and the stronger the public pressure, the more likely Germany may accept some kind of change, perhaps lower in every month the percentage, or set in a screw account where the money gets paid but it doesn't be used

by by Russia to buy military equipment. I don't see the current situation being able to last forever. You mentioned there is something you can to Ricardo Houseman's proposal of attacks on Russia's exports of oil and gas. He says that Russian producers would bear the costs and not Western consumers, which would ensure that Russia doesn't profit for its war, but the rest of the world can still import its fossil fuels. What kind of consensus would it take for

this proposal to be enacted? Is it even a possibility. It's very difficult to get a consensus in Europe for that because Hungary most likely will block it. So it will have to be several European countries taking that decision, which could happen the French government, who is pushing for some sort of penalties on Russian oil, I said that he's willing to wait a few more weeks to see if the German government chains his view. But I don't see a full European Union consensus that includes Hungary on

this happening anytime soon. And for the Ukrainians a few more weeks is a lot different than for the rest of the world. Indeed, Goldman's Jeff Carry points out that coal is fungible oil less, so gas is almost impossible. It's almost completely non fungible. Is there a way around this somehow? The only way for gases really aided use less and that should be an effort, and I think that that has been the biggest piece missing. We saw

that the population is willing to do significant sacrifices. We saw that during COVID, and I think that there is a lot of public support for Ukraine. So you link that you are helping Ukraine by lowering your thermal state a bit and just we're in a jumper at home. I think that there will be support for that. But burying our reduction in demand and just bringing different supply, and for that you need an energy import terminal, which Germany lacks. Gonna fast track one, but that's going to

take a bit of time. In the meantime, there is not much solution to Russian gas that just continue buying it. Yeah, And how I want to ask you about the huge energy problems we're seeing in places like Sri Lanka, Pakistan, also Argentina and other Latin American countries. We're seeing massive protests and even electoral challenges because of this. Can the world cope with any further energy adjustments given that as already shortages and inability to pay by many of these countries.

You're right, and that's a very important situation. Is that the province of the wall on energy pree day, the invasion of Ukraine. We went already on a tight l and demand situation for things like call and natural gas, perhaps less so for oil. It's gonna be difficult for developing countries and poorer countries to cope with very high energy prices because it's not just one particular energy product that is expensively was in the case of the seventies

when the price of oil went through the roof. It is every form of energy where there is oil, gas, call, electricity, and even if you think about the energy transition, the metals use on batteries are very expensive now, so they're gonna face a situation in which they cannot just try to reduce guys and buy call while call is equally expensive. And the main problem for them is that they can

be outbeait by the richer countries. So one of the things is happening at the moment is that Europe is getting the extra supply of LNG, but as at the cause of poorer countries in particularly Asia simply not getting supplies. Have your plus in London, Thank you listeners, don't forget to reach out all thoughts, suggestions and o Binion's welcome. I'm at monequent on Twitter or emails v Quinn at

Bloomberg dot Net to the markets now. Very happy to be joined by John authors in New York and near case are in Washington, d C. John, I want to start with you first about a piece you wrote this week. We are seeing the partial the solution of globalization as the predominant force among market economies. That's just a fact. The debate has been raging. It's in full swing that this might be the beginning of the end for those who enjoyed the spoils of things like freeer trade, more

open borders. You point out this week, though, that for those who missed out on globalizations upside the so called discontented countries, there might actually be an opportunity to profit from the decline of the liberal world order. There really should be such an opportunity. The question is whether those

countries are going to take it now. I I wrote specifically about Mexico because I you know, I worked there as a report from Mexico for four years when the current president was mayor of Mexico City, so I feel

qualified to comment on that particular country. Mexico was the classic example it through in its lots with globalization, with the nap to Trade Agreement, the Mackeladora sect, which is the idea of sending components from the US to be assembled on the Mexican border and then sent back leveraging Mexican cheap labor. And then a few years after and after China joined the w t O and Mexico absolutely

got it in the neck from Chinese competition. China's labor was so much cheaper than it justified the cost of sending stuff right the way across the Pacific. With Lopez Operas or taking over now the former mayor of Mexico City, he came in very much with a mandate to move back from globalization because quite reasonably, lots of Mexicans felt

it having delivered for them. And I fear he's doing so at just the wrong moment, because they are now even Chinese companies looking to relocate to Mexico given the desire from everybody to shorten supply chains. There's a chance that they opened themselves to globalization at the wrong moment and trying to shut themselves off from it at the

wrong moment. Is there advice that you would offer some of these countries, because literally figured out how to grow it's used the system so well, whereas other countries didn't. China used to be the same size GDP wise as Russia, say, thirty years ago. It's now ten times the size of Russia, and Mexico used to be about ten times the size of China forty years ago, which is horrifying, and China has now overtaken Mexico. I think one part of this is that if if you can arrange not to have

a lot of datural resources, it helps. Mexico is well endowed in natural resources. Career has more or less none. Career had to be much harder, feist year more innovative,

and that worked in the long run. I think the notion we are moving into a multipolar world or whatever buzzword you want to use, rather than the big W t O style free trade agreements, individual partnerships now seems to be the way to go, hammering out a deal to provide specific things to specific destinations in a way that gives more of a sense of security, more of a sense of consistency than we currently get from a

very ambitious multilateral system that is obviously deeply imperiled at present. Well, we're seeing all sorts of chaos, particularly across the countries of Southeast Asia. I'm seeing electoral chaos, market chaos, energy chaos. Are there other countries we should keep an eye out for. Brazil is always a fascinating case. So far, they very much did benefit from globalization. The question is whether they

can move forward from where they are now. India becomes an interesting pivot for the global system shortly, and I suppose finally that there is this. It's something that's been written about, speculated about for a long time. Particularly East Africa. There's the notion of the Indian Ocean rim taking over as a place of dynamism. You do see quite a lot of signs of growth in East from obviously from

very low levels. It's it's conceivable that that becomes the next nerve Sensen, let me bring in near Kesar, who's in Washington, d C. Because I want to at once broaden this conversation and also maybe narrow it a little bit. Because the Federal Reserve is in the background here as it always is. You know, it is the central bank

to the US, but also really to the world. Near the Fed's job has become so much more complicated, and visibility is so much less now, and we have a federal reserve that's going to move the most aggressive pace in at least twenty years. More than that, in fact, is the Fed's job to a bile this year, Well, I suspect it will be, although I don't know how much you can worry about the spillover effect outside of the US, and I think a lot of the problem

is that we just don't like the choices we have. Unfortunately, I was very open minded to the idea that this inflation would be transitory, and I wrote a couple of pieces about it actually last year. But I think at this point it's gone on long enough that whatever you call it, I think the FED is right to move more aggressively, and it does appear to be doing that. We often talk about the spillover effect in the US anyway, in binary terms, you know, will it will it cause

a recession? Won't it cause recession? But I think it's useful to just keep in mind that any amount of tightening is going to be painful to some extent, and ultimately, you know, whether we slow down the economy but a verder recession, or whether we have a model session, or whether we have something deeper I don't know that we

have a choice anymore. I mean, I think at this point we've got to bring down inflation, and whatever the impact of that will be will be in the US, and I suspect it will have effect outside the US, but I'm not sure the Fed is worried about that. Yeah, John, we can look at all sorts of market indicators of inflation, and we like to look at you know, the Cleveland expected ten years, the ten year tips break even it's

at two eighty nine right now, and so on. Are these useful these days when we don't know whether the Fed will move two hundred twenty five basis points this year or if the situation will change entirely in several weeks. They're they're useful because the market is a player in this. Markets can create their own reality. To some extent, what we've seen in the yield curve in the last week

inverting suggesting the chance of a recession fairly soon. And then we get the q T announcement that the Fed really is going to very aggressively try to reduce its balance sheet. That shifts the curve completely around and into some extent that is because the market will take things to a certain point and then it will be impossible to go beyond them. The market sets demarcate the terrain

for the FED. Unlike Near, I did think that this was more than transitory at a relatively early stage last year. But I would also say that since the turn of the year there is a huge helping of bad luck as well. Like whether you're on Tree team transitory or not, you weren't to know that Putin is going to invade Ukraine, and you weren't to know that we were going to have shutdowns on the scale we've had in China, that the zero COVID policy finally bites them. But I don't

think the FED has a choice either. If they don't do anything, you will get very serious inflation, and that in itself will damage growth. So because of the need for credibility, they have no choice but to proceed on the path there on Yet Near. I mean, it's been quite interesting because as huge as the moves we've been seeing are in the treasury market, there does seem to be at least some kind of, if not calm, rationality

to this market. We're not seeing major moves on the part of investors that would indicate that they're panicking or anything like that. Well, I think some of that has to do with the fact that you know, this FED is communicating. I think often so the market has an opportunity to digest. But you know, I would add I agree with what John hath said. I would add also that the value of break evens is that they signal to the FED whether market participants believe what the FED

is saying. And I think the last few months have been interesting and instructive because you know, the FED was reassured us for a long time that it was serious about fighting this inflation, that it would not fall into the trap that the nineties, early ninety seven, the late nineties and most of the nineteen seventies FED fell into.

And the break evens were pretty modest. I mean, they were hanging around the low twos for a while, and then they started to turn up and to meet that was a signal that the market was telling the FED that it's not entirely convinced that the FED is going to step in and do what needed to be done. And then you saw it the FED turn it became a lot more hawkish, a lot more FED governors came out and said that they were seriously, Now we're talking

about three bases points or more. Ray heighs in the FED funds rate, and I think that's really the conversation between the Fed and the market primarily in my opinion, and the break even. One very interesting thing is if you look at the five year five year break even, this infuriating the complicated financial construct, which looks at what they expect inflations be from the five years starting five years from now. That is it its highest for six or seven years, but it's still only two point five

something and it is really never bursts upwards. There was always been some confidence that this inflation can be overcome within five years, which I hope is right. Yeah near. I mean you talked about spillover effects. Obviously, emerging markets are watching the FED very carefully, and we're seeing a divergence. China, for one, is going in the opposite direction or was at least is there a spillover effect the other way around?

I mean, the fact that there's so much turmoil and so many emerging market countries, does that at all impact US markets over the coming twelve months. It's interesting to look at the way markets are priced the US relative to the rest of the world and how they have been priced for a long time. I mean, you know, the US has really been the big stock market winner

over the last ten years. I'd say anyone in the US with a diversified portfolio will tell you that it's just been miserable to own anything, at least stock outside the US. And so when you look at that, you have to or at least I can't help but think that a lot of the bad news that we're hearing around the world is to some extent baked into asset prices outside of the US in a way that it's

not inside the US. And the question is why. Is it because investors think that the US will somehow avoid all of the things that we're seeing around the world

at the moment? Is it because investors with respect the US assets haven't yet digested the possibility that, you know, some of this bad news could land on our shores, including the inflation by the way, And my guess is that, you know, a lot of what we're seeing outside the US is already baked in the asset prices there, so I don't think it's going to get a lot worse.

What I worry about is that if we continue to struggle in the U S. I with inflation or either because you know the FET has to become more aggressive and slow down the economy, that we'll have to reprice our own assets. And so from an investment perspective, I'm more worried about the U S and I am the rest of the world Near case Are and John auso is.

We're not choosing to end all conversations not with you, though, as always, we love to hear from you at vaney Quinn on Twitter or send your thoughts to Quinn at Bloomberg dot net. We're produced by Eric Mullow. Till next time on rec Opinion, The Belove